BUSI 620: Global Economic Environment

Pretest

1. The Total Cost

-The Total Cost (TC) function shows the relationship between the total cost and the output (Q)

-Assume that the Total Cost function of a company is estimated to be TC = $180 + $70Q where Q is the output in units.

-What would be the Total Cost if the company produces 120 units?

a. $7,180

b. $8,400

c. $8,580

d. $180

2. The Average Cost

-The Average Cost (AC) or the unit cost is defined as TC/Q

-Use the information from #1, what would be the average cost for the company if it produces 120 units?

a. $71

b. $71.50

c. $71.80

d. $72

3. The Marginal Cost

-The Marginal Cost (MC) is defined as (change in TC) / (change in Q) = Δ TC/ΔQ

-What is MC when Q changes from 101 to 102 units? Use the following data:

Q TC

100 $7,180

101 7,250

102 7,320

a. $70

b. $80

c. $90

d. $180

4. The Demand Function

-The Demand Function shows the relationship between the Quantity Demanded and factors that affect the purchase.

-Assume the Demand Function faced by a firm is a linear form,

Qd = 7,000 – 15P + 0.4I

-Where, Qd is the Quantity of the product sold, P is the unit Price, and I is the per capita personal Income.

-Show the Demand Function, if I is known to be $25,000.

a. Qd = 7,000 – 15P

b. Qd = 10,000 – 15P

c. Qd = 25,000 – 15P

d. Qd = 17,000 – 15P

5. The Point Price Elasticity of Demand

-The Price Elasticity of Demand (Ep) is defined as the percentage change in quantity demanded of the product divided by the percentage change in its Price (P). That is

Ep = (change in Q/Q) / (change in P/P) = (Δ Q/Q) / (ΔP/P)

We have the following data:

P Q

$4 200

$3 300

$2 400

-What is the Point Price Elasticity of demand when the price changes from $3 to $2?

a. – 2

b. – 0.5

c. -1

d. – 1.5

6. The Linear Regression Model

-A Linear Regression Model for estimating the trend is:

Tt = T0 + bt

-Where Tt is the Value at Time t, T0 is the Value at Time 0, which is the Base period, b is the amount of growth each period, and t is the Time period.

-If we estimate the trend for a product sales from the first quarter of 2000 (t=1) to the last quarter of 2003 (t=16) to be:

Tt = 12+ 0.6t

-What is the product sales forecast for the third quarter of 2004 according to the above estimated trend equation?

a. 22.8

b. 23.4

c. 24.0

d. 24.6

7. The Present Value

-The Present Value (PV) of a project is given by:

n

PV = Σ Rt / (1+k)t = R1 / (1+k)1 + R2 / (1+k)2 + … + Rn / (1+k)n

t=1

-Where Rt is the estimated net cash flow from the project in each of the n years considered, k is the risk-adjusted discount rate, and Σ refers to “the sum of.”

-If k is 10%, R1=$250,000, R2=$300,000, R3=$350,000, and n=3, what is the present value of the project?

a. $738,167

b. $740,000

c. $742,890

d. $750,000

8. The Expected Profit

-The expected profit is given by

n

E(π) = Σ πi * Pi = π1* P1 + π2 * P2 + … + πn * Pn

i=1

-Where πi is the profit level associated with outcome i, Pi is the probability that outcome i will occur, and i = 1 to n refers to the number of possible outcomes.

-Use the following data to calculate the expected profit for a company:

Profit Probability of occurrence

$600 0.30

300 0.45

700 0.25

a. $500

b. $480

c. $600

d. $490

9. The Equilibrium Price and Quantity

-If the Demand (QD) and Supply (QS) curves for a product are:

QD = 625 – 35P

QS = 175 + 15P

-The Equilibrium Price and Quantity will be the Price and Quantity when:

QD = QS, that is 625 – 35P = 175 + 15P

-Find the Equilibrium Price and Quantity for this product.

a. P = $9, Q = 310

b. P = $8, Q = 295

c. P = $10, Q = 325

d. P = $6, Q = 265

10. The Average Cost Equation

-The equation for the Total Cost (TC) is given by:

TC = 10 + 4Q + 3Q2 + 5Q3

-The equation of the Average Cost AC (= TC/Q) would be:

a. 10 + 4Q + 3Q + 5Q2

b. 10 + 4Q + 3Q + 5Q2

c. 10 + 4 + 3Q + 5Q2

d. 10/Q + 4 + 3Q + 5Q2

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